Multifactor Models And Their Consistency With The ICAPM

Whether any multi-factor model can be interpreted as a variant of the Intertemporal CAPM(ICAPM)has been a hot topic in asset pricing theory.ICAPM limits the time series and cross-sectional behavior of state variables and factors.If a state variable to predict investment opportunities in time series regression positive(negative)changes,then its innovation should be in their respective factor model of cross-sectional survey more positive(negative)price risk.Second,the market risk price must be an estimate of the relative risk aversion coefficient,which is economically reasonable.This paper uses the U.S.stock market data from 1967 July to 2016 December and the Chinese stock market data from 2007 July to 2018 October,researching on individual stocks cross-section whether exposure to risk premium state variables and the variables in the time series prediction way of macroeconomic activity.The results show that the multifactor models we examine do a reasonably good job empirically explaining the average excess returns of our 25 size-B/M and 25 size-momentum portfolios,and the results indicate that the multifactor models investigated can be justified by the ICAPM according to the Chinese and American data.The findings suggest that investors are ultimately focused on business cycle risk and therefore need to pay a premium for variables that contain systemic economic news.